Once upon a time there was no student loan crisis. Back then we had a simple test for giving student loan debt relief to borrowers who claim they can’t pay. If the requirements were met, student loans were discharged in bankruptcy. Borrowers who didn’t want to expose themselves to the strictures of the bankruptcy process, (or were ineligible for bankruptcy) would continue to owe what they borrowed.
It was ill advised policy to take bankruptcy law out of the student loan equation. The change occurred in the 1990’s. (A tiny exception remains for the almost impossible to achieve “undue hardship” bankruptcy provision). The present crisis is the fruit of that ill- advised policy change. The elimination of an attainable bankruptcy discharge removed an important safety valve. Bankruptcy dischargeability used to protect the economy from the explosive pressures now referred to as a student loan debt bubble.
We can fix the problem with no need to expand the court system. There will be no need for additional expenditures of public money to administer a student loan fix. The determination of discharging student loan debt can be effortlessly returned to an existing bankruptcy court caseload. Humankind will never devise a bureaucracy that can accomplish the task at hand with as much justice and efficiency as what the bankruptcy courts already do on a daily basis with credit card debts and doctor bills.
Those who claim the bankruptcy law is soft should know better. Today’s bankruptcy law is actually tougher on bankruptcy filers than it was 100 years ago. Unlike then, a consumer of today who files bankruptcy must establish insolvency on a cash flow basis, (in addition to numerous other strictures that govern the discharge of specific debts, the exemption of assets, and the granting of a general discharge of debts).
Cash flow insolvency must now be proven by every consumer bankruptcy filer. Where it can’t be proved, the case is rejected. This happens under two separate examinations. First, an arbitrary means test using standardized living expense formulas is used to determine if the debtor theoretically has excess disposable income left over after paying for necessary basic living expenses. Then there is a separate detailed analysis of each person’s actual income and actual living expenses. Individual consumers who have disposable income over and above what the court determines is needed for reasonably necessary living expenses are denied a Chapter 7 bankruptcy discharge.
Allowing student loans to be included in bankruptcy, (after a suitable waiting period) will bring justice and consistency to the granting of relief. It will provide circumstantial assurance to the public that relief is granted only to deserving individuals. It will also impose discipline on irresponsible student loan lenders and diploma mills.
The bankruptcy court has the proven expertise of determining if and when an individual should be granted debt relief. After a waiting period of 7 years, (as in the previous bankruptcy statute) or some other suitable waiting time, society will enjoy the adequate assurance that individuals cannot grab their diplomas and rush off to file bankruptcy on their student loans.
The social and financial stigmas of bankruptcy remain strong. Those will continue to serve as a powerful deterrent that will keep all but the most deserving individuals from seeking bankruptcy relief. The bankruptcy law already has teeth strong enough to chew through the student loan problem. Dismissal of the “bad faith” bankruptcy case is already the norm.
Leon Bayer has been practicing bankruptcy law in Los Angeles, California since 1979. His primary focus is on representing individuals and small businesses. He is a founding partner in the law firm of Bayer, Wishman & Leotta and is a Certified Specialist in Bankruptcy Law. You can visit his professional websites at www.debt-relief-bankruptcy.com www.bankruptcyblogger.org and Mr. Bayer authors the “Ask Leon” series on Nolo’s Bankruptcy, Debt & Foreclosure blog, and writes on bankruptcy topics for Nolo’s website. In addition, Mr. Bayer devotes a significant number of hours to volunteer legal services. The State Bar of California has commended Mr. Bayer for this work every year since 2004. Mr. Bayer’s professional affiliations and leadership roles are many, and include: President of the Los Angeles Bankruptcy Forum (1995-1996), member of the State Bar of California’s Law Advisory Commission on Personal & Small Business Bankruptcy Law (1996-2000), and exam grader and question writer for the State Bar Legal Specialization test on Bankruptcy. Mr. Bayer is a frequent lecturer on bankruptcy law. He has spoken at the former Bridging the Gap program for new lawyers, lectured on bankruptcy case law developments at a number of the State Bar of California Annual Meetings, and has presented bankruptcy law material at many other educational programs. Mr. Bayer’s frequent television appearances include interviews on KCAL9 News and EXTRA (where he weighs in on various celebrity bankruptcies). He has also served as a bankruptcy expert on many different radio shows and news stations, and is a frequent guest on KALW-FM public radio’s Your Legal Rights. Mr. Bayer is currently co authoring a revised edition of Stephen R. Elias’s The New Bankruptcy for Nolo. Other publications include The Essentials of Chapter 13, Daily Journal Report, December 18, 1987, Basic Bankruptcy, California Practice Handbook, Matthew Bender 1992, 1993 (contributing editor), and Personal and Small Business Practice in California, CEB Bankruptcy Practice Guide, 2003 (reviewer and contributing author).